The State Subsidies War: Time to Settle Our Own Disputes

A worker checks a shipment of outgoing boxes at the Amazon.com warehouse facility in New Castle, Delaware (Tim Shaffer/Courtesy Reuters). In 2011, Amazon received $7.5 million in subsidies from the State of Delaware.

A worker checks a shipment of outgoing boxes at the Amazon.com warehouse facility in New Castle, Delaware (Tim Shaffer/Courtesy Reuters). In 2011, Amazon received $7.5 million in subsidies from the State of Delaware.

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Two decades ago, the United States demanded that other countries in the World Trade Organization (WTO) agree to significant restrictions on “trade distorting subsidies” of various sorts, such as government grants, tax breaks, or other benefits that would allow companies an unfair advantage against others in the international market. All well and good, but as the proverb has it: “Physician, heal thyself.”

While the collective impact is harmful, it is easy to understand why such practices persist. If every other state is offering such incentives, it is hard for a few states to take the moral high ground and refuse to play the game. The promise of new jobs – however costly and perhaps fleeting – is a powerful motivator for any state, especially in a weak economy like the one that still persists.

Subsidies wars are economic foolishness, which is why the United States has tried to so hard to use the WTO and other international trade rules to restrict them in global trade. Some of the subsidies identified in the Times’ database could probably be fodder for WTO dispute settlement cases. A number of the largest recipients – including GM, Ford, General Electric and Boeing are either big exporters or compete with imports. The issue of state subsidies, indeed, has been one of the big ones in the long-running Airbus-Boeing dispute in the WTO. But a successful WTO case demands that some foreign country prove that its companies have been harmed by the U.S. state subsidies. In most cases, the only victims here are other taxpayers, recipients of state government services like public education and Medicaid, and the states that lose the bidding wars.

Legislation: The U.S. Congress should pass legislation that puts in place domestically many of the rules of the WTO’s “Agreement on Subsidies and Countervailing Measures.” The bill would distinguish between prohibited “specific” state subsidies to companies – such as tax refunds or reductions, cash grants, loans or loan guarantees – and permitted government expenditures such as infrastructure, job training, or across-the-board corporate tax reductions that are broadly beneficial to business.

Adjudication: The federal government should establish dispute settlement panels, under the authority of the Federal Trade Commission. States would be allowed to bring complaints in cases where they believe they have been harmed by prohibited subsidies offered by other states. Much as in the WTO, panel decisions would be binding, though an appeal mechanism to domestic U.S. courts would need to be created.

Penalties: The most obvious remedy is that the tax break or other prohibited subsidy would need to be withdrawn immediately. In the EU system, there is also a provision that can require the companies to pay back the subsidies. Another possibility could be a cash penalty that the offending state must pay to other states that were harmed by its actions.

The particulars would obviously take a lot of negotiation, and there may be constitutional issues, though this would seem to fall clearly under the federal government’s power to regulate interstate commerce. But the politics should be easy – Democrats should readily favor an end to corporate tax breaks that rob state governments of revenue, while Republicans should readily support an end to government interference that distorts competition in the market.

While some states would protest, and the beneficiary companies would surely object, there would be benefits all around. The states would stop wasting money they don’t have to waste, and the companies could get back to focusing on making quality products at reasonable prices rather than lobbying state governments for sweetheart deals.